Wall Street’s fears soared last week, as stocks suffered their worst week since earlier this year in March.
There are many possible catalysts for the decline, including higher long-term interest rates and the trade war with China. However, the reason most cited is the Federal Reserve (Fed), our nation’s central bank.
Recently, Federal Chair Jerome Powell suggested the Fed could raise short-term interest rates much further before slowing down the economy. While this is probably a true statement, it was an unexpected statement.
Over the course of the bull market that began in March 2009, stocks have been supported by strong fundamentals and very supportive Federal Reserve policies. With the Fed possibly being less supportive, stocks will need to rely more on fundamentals, such as the robust job market, solid consumer spending, and growing corporate profits.
These healthy fundamentals point to stocks moving higher over the longer term, but a less supportive Fed may mean stock investors experience more ups and downs in the months ahead.
Even though market turbulence like this is never fun, it’s quite normal. What’s not normal was the lack of volatility enjoyed in 2017 when the biggest drop for large-company stocks was about 3%.
On a calendar year basis since 1980, large-company stocks have experienced a drop of 14% on average each year according to our calculations at Simply Money Advisors. During that same time, the average annual return for the stock market was +13%, and 84% of the years had positive returns.
Besides keeping an eye on the stock market, investors will be paying attention to economic reports on retail sales, manufacturing, and housing, as well as the release of the minutes from the last Fed meeting.
Additionally, earnings season gets under way with 55 large companies reporting, including Bank of America, Goldman Sachs, Netflix, IBM, and Procter & Gamble to name a few. Earnings are expected to be about 25% to 30% higher compared to the same time last year, on average.
The Simply Money Point
This recent bout of market turbulence may continue in the short run as Wall Street adjusts to a less accommodative Federal Reserve, higher long-term interest rates, and an ongoing trade war with China, so be prepared. However, our low recession risk suggests stocks should recover.
Recession risk matters because every bear market except one over the past 50 years coincided with an economic recession. Currently, none of the leading economic indicators we follow are pointing to a recession in the next 6 to 9 months, which is good for the stock market.